IMFSurvey Magazine: IMF Research

Freight train traveling near Daggett, California, United States. Regional trade arrangements such as the North American Free Trade Agreement govern an increasing proportion of global trade (photo: David Lawrence/Corbis)

Increased income inequality partly due to technological advancement, government policies

With talks on a global trade deal stalled, it is now up to trade ministers to resolve their differences at the World Trade Organization Ministerial Conference in Bali, Indonesia, on December 3-6. That will be tough, writes trade expert Jagdish Bhagwati in the IMF’s Finance & Development (F&D) magazine.

The December 2013 issue of F&D looks at the forces affecting global trade today. Some of these influences offer new opportunities for poorer countries to become part of the global factory, while others present barriers to future trade deals.

Regional trade poor substitute for multilateral

The liberalization of trade through the postwar multilateral trading system played an important part in creating prosperity and, in turn, reducing global poverty, Bhagwati recalls in “Dawn of a New System.” But the failure to conclude the Doha Round of multilateral trade negotiations—and the emergence of bilateral and regional negotiations as the preferred, but suboptimal, alternative—has cast a dark shadow over the future of the multilateral trading system.

Bhagwati describes the WTO as a three-legged stool, resting on multilateral trade negotiations, rulemaking, and the dispute settlement system. With the breaking of the first leg, the other two are weakened. Rule making had taken place largely during multilateral trade negotiations, and the dispute settlement mechanism would also be weakened if disputes were resolved in other bilateral and regional forums instead of in the WTO.

Financial services

In “Global Banking Regroups,” Stijn Claessens of the IMF’s Research Department and the WTO’s Juan A. Marchetti investigate the increased scrutiny of international financial services—especially international banking—prompted by the global financial crisis. “After two decades of rapid expansion across borders,” they write, “global banking is retreating.” The crisis highlighted the ease with which problems in one nation can be transmitted to others and, in turn, the importance of coordination among financial regulators.

Supranational regulation and supervision of international financial activities are needed to protect countries individual economies. Trade in financial services can increase efficiency and transfer of knowhow and technology, but open financial borders can amplify the effects of financial strains in other parts of the world on domestic economies.

Intellectual property

Like financial services, ideas, information, and knowledge—in the form of patents, music, movies, and computer software—are increasingly at the center of the 21st century global economy. In “Smart Trade,” Thierry Verdier, professor at the Paris School of Economics, discusses trade in intellectual property. Intellectual property rights—protecting the knowledge and information embodied in copyrights, patents, and trademarks—are controversial.

Because it’s hard to stop people from using or consuming information without authorization, “free riders” can enjoy the benefits of that information without paying for it. If intellectual property rights aren’t protected, free riders can kill the incentive to invest in creativity and innovation. This means medications aren’t invented, software isn’t developed, and songs aren’t written. Growth and development suffer.

Verdier writes that the best way to narrow the gaps in how intellectual property rights are protected across countries is the WTO-based Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement. It aims to harmonize intellectual property rights under common international rules, balancing the benefits and costs of protection between countries that innovate and those that do not, to encourage domestic innovation and international diffusion of technology. Flexibility under this agreement is one important path to improved results of these economic trade-offs.

Chain-linked trade

Global supply chains are one of the most powerful—and promising—forces in global trade. Manufacturers have created global factories that rely on parts produced in countries all over the world—with the goal of reducing costs (see video). In “Adding Value,” European University Institute professor Bernard Hoekman explains that supply chains—in which stages of production are in different countries—are a major reason global trade in goods and services has grown at triple the rate of global GDP since 1950. “Supply chain trade offers new opportunities to low-income countries to become part of the ‘global factory,’” says Hoekman, and add an increasing share of the value added in global manufacturing.

While countries overall benefit from global supply chains, the move of low-skill jobs from advanced economies is one reason, along with technological change, that income inequality is at historic highs. In “Who Let the Gini Out?” IMF economists Davide Furceri and Prakash Loungani conclude that two other factors contributing to increased inequality are the opening up of capital markets to foreign entry and competition (“capital account liberalization”) and policy actions by governments to lower their budget deficits (“fiscal consolidation”). Both these policy actions confer benefits, the authors stress, and governments do not undertake them on a whim. But these benefits should be weighed against their impact on equity, with an eye to protecting the weak and vulnerable.

Inequality is threatening Asia’s growth miracle, report IMF economists Ravi Balakrishnan, Chad Steinberg, and Murtaza Syed, in “An Achilles’ Heel.” The past quarter century of dramatic growth in the region has reduced poverty overall, but it has also driven a wedge between the haves and the have nots. This presents an ethical dilemma, but also threatens economic growth.

John Norregaard argues in “A Fair Assessment” that countries should make more use of property taxes to fight inequality. The value of a property is hard to hide and generally reflects the owner’s wellbeing. The taxes in turn can be used to finance services that feed the needs of the poor.

■ Also in this issue, Ake Lonnberg, recently retired IMF currency reform expert, explains in “New Money” how a country introduces a new currency. Oxford professor Paul Collier writes in “Under Pressure” about the importance of communications and managing expectations after a big resource discovery. And we profile Peter Blair Henry, dean of New York University’s Stern School of Business. As a child in Jamaica, Henry experienced firsthand what happens when leaders pursue misguided economic policies. Today, he continues to study why some countries are rich and others are poor—and how business can help.

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